Consultation on independent financial advice
Please note: We have not published a cost-benefit analysis as part of the consultation process. Please disregard Question 4.
It is necessary to review the SRA's current position on the provision of independent advice both because of the Financial Services Authority's Retail Distribution Review and as part of a more general review of SRA Handbook requirements.
This consultation sets out the following:
- The regulatory background
- A summary of the issues which have arisen
- A discussion of the options for revising the requirements of the Handbook
- An initial analysis of the potential impact of possible changes
The SRA seeks views on the options and the potential impact of the changes.
FSA regulation of financial services
The Financial Services and Markets Act 2000 (FSMA) made the Financial Services Authority (FSA) the single statutory regulator of financial services in the United Kingdom.
The FSA has recently completed a Retail Distribution Review; aimed at improving the services which clients receive from providers authorised by the FSA. An outcome of that Review is that FSA regulated entities will have to improve the clarity with which they describe their services to their clients so that their customers know whether they are receiving advice that is independent or whether it is restricted in some way. This means that from 31 December 2012 advisers must ensure that customers understand that their advice is independent or restricted.
There is no assumption that a firm which currently meets the definition of giving independent advice will automatically be able to describe itself as independent in future. If a firm claims to be independent from 31 December 2012, the FSA's requirement is that it will need to consider a broader range of products than is currently the case (i.e. not just packaged products but also structured investment products, all investment trusts, unregulated collective investment schemes and any other investment that offers exposure to underlying assets, but in a packaged form which modifies that exposure compared with a direct holding in the financial asset); provide unbiased and unrestricted advice based on a comprehensive and fair analysis of the relevant market; and inform its clients before providing advice that it provides independent advice. The FSA's changes are designed to reflect the idea of independent advice being free from any restrictions that could affect the firm's ability to recommend whatever is best for the client.
Advice that does not meet the new FSA definition of "independent" in this context will in future be described as restricted advice; for example advice on a limited range of products or providers. Regulated entities falling into this category must disclose in writing and orally, before providing advice, that they provide restricted advice and explain the nature of the restriction. They will need to be satisfied that the products which they recommend are suitable to the client's needs.
Some financial advisers who currently describe themselves as independent may not satisfy the independence requirements of the Retail Distribution Review and therefore fall into the category of giving restricted advice after 31 December 2012.
Exempt regulated activities
Part XX of FSMA enables law firms which meet certain conditions, to be treated as exempt professional firms and to carry on activities known as exempt regulated activities under the supervision of, and regulation by, the SRA. These firms comply with the SRA Financial Services (Scope) Rules 2001 (the Scope Rules) in the Specialist Services section of the SRA Handbook. The Scope Rules include prohibitions and restrictions on what activities can be performed under the Part XX exemption.
Referral of clients for financial services
The SRA's provisional preference is for Option 3, for the following reasons:
It supports outcomes-focused regulation as it does not prescribe how the outcome must be achieved
It reflects the possibility that under the new regime introduced through the FSA’s Retail Distribution Review, many firms which are currently described as independent financial advisers or independent intermediaries may not be able to label their advice as independent because they will not, for example, advise on a sufficiently broad product range meaning that in the absence of the changes suggested under option 3, the lawyer would be unable to recommend them to their client
- It means that the lawyer must ensure that the client understands the implications of a particular recommendation
- It ensures that the client is involved in the decision-making process
- It removes restrictions of customer choice, if seeking financial advice referral through a solicitor.
The SRA is also proposing to amend the wording of the Scope Rules so that in rule 5.1 and elsewhere, the term "packaged products" is replaced with the term "retailed investment product", with the same meaning as that given by the FSA. The definition is also included in the SRA Handbook Glossary 2012 and the SRA proposes that this is removed. The SRA also invites comments on these changes.
Equality impact assessment
Please note: We have not published a cost-benefit analysis as part of the consultation process. Please disregard Question 4 below.
- Do you have any comments to make about the suggested change of terminology and removal of references to independent intermediaries and to packaged products and replacement with language arising from the FSA's Retail Distribution Review in terms of authorised advice and retail investment products?
- Which of the three options do you prefer in respect of chapter 6 of the SRA Code of Conduct?
- Do you have any comments on the possible impact of these options in terms of effects on legal firms and protection of clients' interests?
- Do you have any comments on the costs and benefits of the options as identified in the cost-benefit analysis?
- Do you have any other comments to make on these proposals?